Managing the downturn, Ready for the Upswing

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1 Managing the downturn, Ready for the Upswing Scott McGregor President and Chief Executive Officer

2 Agenda for today Managing the downturn, ready for the upswing Scott McGregor, President and CEO, Focus on wireless connectivity Phil Pollok, Senior Vice President, Focus on mobile communications Thierry Laurent, Executive Vice President, Focus on Identification Karsten Ottenberg Karsten Ottenberg,, Senior Vice President, Summary and round-up See our Digital Consumer demos next door Throughout the day

3 Contents 1 Quick overview 2 Strategy for success 3 Responding to the market 4 Moving forward

4 Contents 1 Quick overview 2 Strategy for success 3 Responding to the market 4 Moving forward

5 Major semiconductor company Revenues of US $6.3 billion in 2000 Focus on silicon systems and standard products for: Communications Consumer Automotive Computing Industrial 33,000 employees Global organization (18 manufacturing centers, 30 design centers, 4 systems labs and over 100 sales offices)

6 Balanced sales by market segment and region Sales by customer type Sales by region 35% 28% 10% 13% 14% Cons Comp Ind Auto Comms 35% 25% 40% Europe APAC NA Source: Philips based on 2000 sales

7 A changing customer base - from Communications Consumer Computing Automotive Industrial Distributors EMS GMS

8 to 2001 Communications Consumer Computing Automotive Industrial Distributors EMS GMS

Great products create leading positions Communication Communication Mobile handsets Cordless Wireless connectivity # 3 with 10.2% share #1 with 15.

9 Great products create leading positions Communication Communication Mobile handsets Cordless Wireless connectivity # 3 with 10.2% share #1 with 15.8% share #2 with 11% share Consumer Consumer TV Tuners Digital Audio Digital STB #1 with >35% share #1 with >60% share #2 with 18% share #3 with 5.1% share Automotive Automotive In-vehicle networking In-car radio Car access & immobilizers #1 with >50% share #1 with >30% share #1 with >60% share Computing Computing CRT monitor drivers Display drivers PC Add-on cards #1 with >30% share #2 with 25% share #2 with 30% share Industrial Industrial Identification Standard products RF discretes, discretes, CATV #2 with >20% share #4 with 5% share #1 with >70% share These These represent represent >75% >75% of of our our sales sales

10 Differentiating technology First in Platforms (Nexperia) Delivers flexibility Reduces time-to-market Efficient IP based design (Sea of IP) Reuse of hardware and software (CoReUse( / MoReUse) HDLi for IP generation and delivery Rapid prototyping for first-time right design CMOS18 with embedded Flash CMOS12 now prototyping QuBIC4 low cost, high performance RF

11 Global manufacturing infrastructure IC Capacity 2 million wafers per year (8 inch equivalent) 20% BiCMOS,, 25% Bipolar, 55% CMOS 170 billion pins assembly capacity Discretes 1.2 million wafers per year (6 inch equivalent) 30 billion pieces assembly capacity Partnerships TSMC & Amkor

12 Contents 1 Quick overview 2 Strategy for success 3 Responding to the market 4 Moving forward

13 Customer strategy: work with winners Focus on Partnership Partner across the value chain Align technology roadmaps; access to Philips Research Jointly develop total systems solutions Partner in growth markets Grow sales to top 20 customers from 50 to 60% by 2005 Grow sales through Distributors and EMS from 25 to 30% by 2005

14 Customer strategy: work closely with our partners Some of many examples: Deep collaboration with major handset makers, such as Ericsson and Nokia A complete mobile telephone solution for DBTel (China) and CEC (China) A complete digital TV solution for major Digital Consumer Electronics player DSP in digital car infotainment system for Visteon Identification products Visa, Shell, Beijing City Transport

15 Product strategy: supporting businesses to winning positions Market growth above 35% Below top 2 Top 2 Market growth between industry average and 35% Market share < 15 % Market share > 15 % Market growth below industry average IFO < 20% IFO > 20%

16 Product strategy: strategic focus Digital CE - Digital TV -STB-PVR - Optical Storage

17 Product strategy: strategic focus RF & Connectivity - Bluetooth Zigbee -USB - Last mile access

18 Product strategy: strategic focus Digital Displays - Display Drivers for mobile and large displays - Scalers - Display processing

19 Product strategy: strategic focus Cellular Terminals - 2 / 2 1 / 2 G - 3G / UMTS - System Solutions

20 Product strategy: the connected home Cellular Digital CE Internet Enhanced and linked content Digital subscriber services (cable, satellite) ZigBee Bluetooth Digital Displays RF & Connectivity

21 Technology strategy Build on Nexperia platforms High performance Digital Video Platform Low Power Portable Platform Leverage process partnership with TSMC / STM Joint development of CMOS10 (0.10µm) TSMC compatible rules, performance and timing CMOS10 end mm R&D and pilot fab in Crolles: : ready Q3/2002 Build on leadership in RF QuBIC4 with SiGe option

22 Manufacturing Strategy Advanced standard CMOS (0.18µm and beyond) in JV s and Foundries Own fabs for value added process options Embedded Memories Analog Cost-effective RF process (QuBIC( QuBIC) Low-cost fabs for commodity processes & discretes Flexibility by outsourcing 15-25% of total

23 Contents 1 Quick overview 2 Strategy for success 3 Responding to the market 4 Moving forward

24 Largest downturn in semiconductor industry history ent Market $Billions 250 Growth Rate Current Market %Growth % drop 80 in industry sales $55B shrink - more 0 than the combined revenues -20 of the top 3

25 Philips took quick action to adapt to the changing market Q1 Q2 Q3 est. Q4 est. CAPEX (M ) Restructuring/ Headcount reduction (M ) Inventories (index 100 in Q1) Headcount (people) 37,160 36,400 34,000 33,000

26 has rejoined the top 10 1H 2000 Sales ($B) 1H 2001 Sales ($B) % change Philips Semiconductors 2.9 (rank 12) 2.6 (rank 10) -13 Top ten Industry Source: IC Insights, August 2001

27 Weekly Run Rate World Wide

28 Philips - ready for 2002 Industry predictions for 2002 WSTS Dataquest IC Insights VLSI Research 8% 12% 14% 20% By Q we will have sized our cost base for single digit growth but are prepared for double digit growth...

29 Contents 1 Quick overview 2 Strategy for success 3 Responding to the market 4 Moving forward

30 A new ambition for We have been a top ten player for a while To truly be a cornerstone of Philips Electronics high technology growth strategy, we need to aim higher Over the coming years this will require Excellence in organic growth Leveraging cooperation across the Philips Group Acquisitions

31 Elements of our growth strategy FUTURE: New opportunities in emerging markets with high growth potential FOCUS: Focus on a few growth areas where we have technology and industry expertise FOUNDATION: Leverage strong leadership positions and competencies

32 The foundation of success RF discretes,, CATV #1 >70% share Tuners #1 >60% share Car access #1 >60% share In-vehicle networks #1 >50% share AD/DA converters #1 >40% share TV chipsets #1 >35% share PC Add-on cards #2 >30% share CRT drivers #1 >30% share STN display drivers #2 >25% share Logic #2 >21% share Digital audio #2 >18% share Cordless phones #1 >15% share Standard products #4 > 4% share Foundation product categories Example: Cordless phone ICs #1 #3 #3 #

33 Focus leading to success in mobile communications Total Wireless Communication #3 Market grew by 20.0% Philips grew by 35.3% Infrastructure #5 Market grew by 35.6% Philips grew by 48.7% Handsets #3 Market grew by 20.8% Philips grew by 34.1% Baseband #10 Market grew by 33.0% Philips grew by 78.4% RF #5 Market grew by 40.9% Philips grew by 24.2% Baseband #2 Market grew by 20.8% Philips grew by 33.1% RF #2 Market grew by 19.0% Philips grew by 36.0% Source: Dataquest Aug 2001 Cordless #1 Market grew 22.3% Philips grew 50.7% Cellular #2 Market grew 22.3% Philips grew 32.7%

34 Focus on new opportunities in wireless connectivity Standards leadership - driving wireless application development Wide portfolio of wireless connectivity expertise First to deliver a commercial Bluetooth-compliant chipset First to ship a million Bluetooth devices First to offer both Bluetooth and ZigBee connectivity solutions First to ship over 6 million radio chips The power behind over half of all modules Integration with full systems - including consumer and mobile communications

35 Focus on Digital Consumer Offering solutions for mid - high end Current focus on analog to digital transition for TV offering solution for digital reception which runs MHP First to deliver architecture and working platform for advanced set top box and DTV solution

36 Creating a new image in digital display solutions Strong position in market Partners with LG.Philips LCD #2 STN drivers #1 in CRT display (esp. TV) Targeting new digital technologies TFT Driver, LCD Scaler and small-panel color STN

37 Future new growth markets Continue successful Emerging Businesses methodology seed: polymer electronics, new ideas: ultra wideband, MEMS, integrated discretes weed: mass storage, SW modems harvest: identification, networking, wireless connectivity

38 Summary Strong past performance has established solid foundation Strategies for customers, products, technology and manufacturing to support growth ambition Managing the downturn, Ready for the Upswing

39 Managing the downturn, Ready for the Upswing

Enabling a world without wires

Enabling a world without wires Phil Pollok Senior Vice President Contents 1 Wireless connectivity 2 Market opportunity 3 Seizing the opportunity Contents 1 Wireless connectivity 2 Market opportunity 3